EDITOR'S TAKE: Stagnant hiring in London is the corollary of pay inflation in Asia

Standard Chartered was among the first. In March it revealed that rising headcount costs at its wholesale bank were becoming an issue, particularly in Singapore and India.

Now warnings of Asian compensation inflation are a weekly occurrence.

OCBC is the latest bank to reveal that staff costs are eroding its bottom line. Yesterday, it said first quarter profits were down 7% on both pay inflation and a decline in non-interest income.

US banks are suffering similarly. When Citigroup reported its Q1 results last month, it revealed that the margin at its Asian institutional clients group had fallen to 28%, from 40% in the first quarter of 2010.

Nevertheless, banks keep hiring. This week, Stuart Gulliver said HSBC was committed to paying, "what it takes" to get the right people for its Asian business.

The impetus for Asian expansion is clear: this is where the growth's meant to be. In the first quarter of 2011, Asia Pac investment banking fees rose 12.3% according to Thomson Financial. In EMEA they rose just 6.4%.

The potential in Asia is huge. China's State Council has decreed that Shanghai must become a global financial centre by 2020. At some point, China is expected to internationalise the Renminbi, opening up its markets in the process. Banks can't afford not to build their businesses in Asia.

And yet, as recent results show, Asian revenue growth isn't happening fast enough to offset the increasing cost of recruiting Asia-based candidates. The faster banks hire in Asia, the more they're in danger of eroding their profitability. And the more that profitability is eroded in Asia, the more costs must be saved elsewhere.

With its newly high base salaries for investment bankers, London is the cost savers' obvious target. Heads of international search firms complain that banks' enthusiasm for recruitment in the City is abnormally insipid.

"The UK is the worst market," says one. "The US is fine, Asia is fine and the Middle East is fine. But the UK is very stagnant. London's just not a high growth market any more - there are 300,000 people working in financial services here now and there will be 300,000 people working here in three years' time."

In different circumstances, the high fixed cost of hiring in London might not be an issue. But when margins are under pressure from a push into Asia they can't be ignored.

Recruiters and candidates in London need one of three things: a big drop in salaries here, slower pay inflation in Asia, or an increase in Asian revenues to justify banks' investments there. For the moment, none appear to be forthcoming.